The Challenge of Climate Change

Is Climate Change Real?

The Earth's climate has always undergone natural changes, largely driven by variations in the amount of solar energy reaching the planet. These fluctuations have historically alternated between ice ages and warmer periods.

However, the term climate change today typically refers to the rising global average temperature. The graph below illustrates the mean temperature in Luxembourg from 1947 to 2023. The upward trend is evident and likely reflects a global pattern rather than being specific to Luxembourg.

Kerry Emanuel, a professor of Atmospheric Science at the Massachusetts Institute of Technology, notes [kerry20] that Earth is in a natural phase where it should be cooling, yet global temperatures have risen significantly, confirming that current global warming is largely anthropogenic. He highlights that the warming observed between 1918 and 2018 is unprecedented compared to the last few thousand years, likely due to the extraordinary concentrations of CO2, levels unseen for millions of years. 

Fiction or Future?

Kerry Emanuel paints a vivid and concerning picture of a potential future:

"Unless humanity makes substantial changes in emissions or their capture, by the end of the century, we could see CO2 concentrations not seen for 50 million years. This was a time when alligators roamed Greenland, and sea levels were 230 feet [70 meters] higher than today."

This description is rooted in scientific projections based on climate models. These models simulate how Earth's temperature may respond to countless physical processes, assumptions, and variables. Among the greatest challenges in these models is incorporating human behavior, which raises critical questions:

• Will the developed world succeed in significantly reducing its consumption?

• Will breakthroughs in renewable energy storage revolutionize the energy sector?

• How will nuclear power and the political will to harness its potential evolve?

• How quickly and extensively will emerging economies like China and India grow?

• How will regions most affected by climate change address escalating food and water shortages?

The answers to these questions will play a defining role in determining whether Emanuel’s alarming vision of the future becomes reality.

Significant Effort Needed to Align with the Paris Agreement

To address the complexity of climate change systematically, the Intergovernmental Panel on Climate Change (IPCC) was established. Its mission is to review, analyze, and communicate research related to climate change to the public. The IPCC has identified four scenarios for the evolution of greenhouse gas (GHG) concentrations by the end of this century. These scenarios, known as Representative Concentration Pathways (RCPs), are classified based on the level of excess heating caused by human-made GHGs, measured in watts per square meter (W/m²) in 2100.

The figure below illustrates RCP levels for four global temperature scenarios. For example, under an RCP of approximately 4.5 W/m² in 2100, which reflects moderate efforts to reduce CO2 emissions, the global temperature is projected to rise by about 2.8°C above pre-industrial levels.

The 2015 Paris Agreement, endorsed by 197 states, represents a global commitment to combat climate change. It sets a target to limit global temperature increases to no more than 2°C by the end of the century. However, as Kerry Emanuel notes, recent IPCC publications suggest that the probability of keeping the temperature rise below 1.8°C is only 5%.

The Widespread Consequences of Climate Change

The scenario of alligators in Greenland and sea levels rising by 70 meters may be highly improbable, but it carries enormous potential costs. According to [kerry20], coastal cities would have no viable means to protect themselves from such catastrophic flooding. The only option would be relocation, leading to significant economic losses and profound consequences for human civilization.

The next figure illustrates the critical interconnections among five major classes of risks. The diagram highlights how environmental changes ripple through various facets of life, influencing society by triggering migration, social polarization, and deteriorating public health.

The Tragedy of the Horizon

The extensive impacts of climate change demand urgent and drastic measures. However, global CO2 emissions continue to rise, increasing by 1.1% in 2023 according to the International Energy Agency (IEA), creating the impression that current efforts are insufficient to slow climate change.

Mark Carney [Car15] introduces the concept tragedy of the horizon, drawing an analogy to the tragedy of the commons, which describes the depletion of a finite, shared resource. In this context, the "horizon" refers to the distant future—beyond 2050—when climate change is expected to affect nearly everyone severely. Addressing this issue requires the current generation to bear the costs of mitigation, even though the benefits of a stabilized climate will primarily be felt by future generations. This misalignment of incentives lies at the heart of the tragedy: the present generation lacks immediate motivation to solve the problem. 

The Insurance Sector: Highly Vulnerable Yet a Key Player in Climate Change

In the U.S. alone, it is estimated that by 2050, between $66 billion and $106 billion worth of existing coastal property will likely be submerged below sea level [ris14].

The insurance industry plays a pivotal role in both mitigating and adapting to climate change. Climate risk insurance has the potential to lessen the impact of disasters by providing financial resources for recovery after extreme events. Moreover, climate adaptation can be incentivized through premium reductions for policyholders who implement preventive measures, such as installing anti-flood doors or early warning systems.

Insurers also wield significant influence by directing investments toward low-carbon sectors, thereby supporting broader climate change mitigation efforts. 

However, to effectively incorporate climate risks into their risk management strategies, insurers must thoroughly understand the implications of climate change on their business operations and long-term strategy.